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Crisis on the high street, where might there be profits?

House of Fraser announced 31 store closures, and Poundworld, which has now gone into administration, are just the latest examples. The high street is in crisis. There are good reasons to think it will get worse. What can investors do?

Article updated: 13 June 2018 at 10:00am Author: Michael Baxter

For me, the biggest surprise about the slow decline in the high street is that it has taken so long. When Woolworth’s packed up at the beginning of 2009, just leaving an online business, it felt as if it was the beginning of the end for the British high street.

In fact, the end has been a slow drawn out process.

A long list of casualties

Maybe you can date it back to C&A, which disappeared from the high street in 2001. Dixons went in 2006 - I had to double check that one, it feels like yesterday. Virgin Megastore’s successor, Zavvi, went in 2008, as did my favourite shop when I was a kid: Gamleys. In 2012, JJB Sports closed, Blockbusters in 2014. BHS left this mortal coil in 2016, and earlier this year we saw the demise of Toy’R’Us and Maplins.

The reasons

The reasons for each fall vary. Blockbusters famously got disrupted by Netflix - but frankly, even if Netflix had not come along it is doubtful it would still be here. Virgin Megastore fell for a similar reason.

Woolworth’s sold products that ceased to be of interest, BHS specialised in cheap, but could not compete with Primark.

There have been recoveries - Waterstones seems to be doing nicely after it was sold by HMV in 2011 to A&NN Capital Fund Management, owned by Russian billionaire Alexander Mamut. It seems to be drawing in the pundits. But then book have risen against ebooks.

There is a lesson in that. Paper books have been saved by design - they really can look quite beautiful these days and Waterstones, with its coffee stores deals, Paperchase concessions, and author talks has become a destination store.

Poundworld was partly hit by the falling pound - eating up margins - and it had a business model that meant it was always going to be second best to Primark.

I happen to like House of Fraser and will be sorry to see it leave my local shopping centre - but then what I like is hardly the point. I am the wrong side of - how can I put it - let’s say I am the wrong side of 30. House of Fraser sells brands you can buy elsewhere, its popularity online, on social media, is poor. Unlike, say, Primark, which has millions of followers.

Local councils, themselves under pressure from never ending austerity, are not helping the high street with ever rising business rates.

Economy

The fact that real wages are so lacklustre does not help either. The last ten years has been terrible for wages relative to inflation. In fact, the average wage today is lower than in 2008. The latest figures offered little comfort. Pay including bonuses rose by 2.5 per cent in April, inflation was 2.4 per cent - so yes, real wages rose, but by a whisker.

Restaurants

There is one thing that you can do on the high street which you can’t do online, and that’s eat. But even in this area, there are signs we are past peak. Prezzo is closing stores, as is Jamie’s Italian. I think that in this sector we are seeing a classic case of the cycle at work. There is demand for restaurants- but too many retailers jumped on the bandwagon. No doubt when the restaurant cull comes it will go too far, and we will see new opportunities emerge.

Online

But it’s not hard to see what the underlying threat is. It’s online.

ASOS - shares up around 10 per cent over the last 12 months, but flat over five years, and Boohoo, down over 12 months and up three-fold over five years - are trailblazing to an extent, but the share price performance is not that remarkable.

Amazon’s shares, by contrast, are up around two thirds over 12-months and 20-fold over five years. That is where the real growth is - and this column has waxed lyrical about the company enough times over the last five years to suggest the rise was predictable.

The future

I fear for the high street, but technology could save it. Virtual reality may prove to be the high street’s biggest threat - where we can do our shopping in virtual space, and try on clothes virtually, represented by an avatar. Augmented reality, which superimposes images over reality, could be its biggest hope.

If you want to invest in retail, you might want to consider the technology that is disrupting it.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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